It’s a new dawn for UK firms reporting on their Environmental, Social and Governance (ESG) activities as the Sustainability Disclosure Requirements (SDR) enters its next phase of implementation. These requirements, set forth by the Financial Conduct Authority (FCA), are poised to transform the landscape of ESG reporting in the country with the primary aim being to combat greenwashing and enhance transparency in the financial sector.
Definition and purpose
SDR represents the UKs flagship policy to drive decision-useful information on sustainability across the economy. This comprehensive regulatory framework mandates companies and financial institutions to disclose their impacts, both positive and negative, on the environment and society. It aims to foster a culture of transparency and accountability in the corporate world, ensuring that companies are aware of their sustainability impacts and are held accountable for their actions and commitments
Key components
The SDR introduces a set of sustainability-related product labels, product- and entity-level disclosures, an anti-greenwashing rule and additional rules regarding sustainable investing for the UK. These labels and rules are designed to guide investors in clearly distinguishing between products that can be considered sustainable and achieve a label, products that refer to ESG characteristics in their name or marketing but do not use a label and non-ESG products.
Entities required to report
The SDR encompasses a wide range of financial institutions, including:
It's important to note that non-EU Alternative investment fund managers are not within the scope of the UK SDR
Alignment with global standards
The SDR has been designed to adhere to international standards, such as the IFRS Sustainability Disclosure Standards, while incorporating specific provisions that address the unique challenges and priorities of the UK market. The UK is expected to endorse the International Sustainability Standards Board (ISSB) sustainability standards published in June 2023, with plans to introduce ISSB-aligned sustainability standards, termed UK Sustainability Reporting Standards, in Q1 2025.
SDR vs. EU Sustainable Finance Disclosure Regulation (SFDR)
The UKs SDR and the EUs Sustainable Finance Disclosure Regulation (SFDR) share similar objectives but differ in key aspects. While both aim to reduce greenwashing and increase transparency, the SDR is more UK-centric, focusing on UK asset managers and products marketed to UK investors. In contrast, SFDR has a broader reach, applying to financial products based or marketed in the EU and financial market participants.
A significant difference lies in the sustainability objective approach. The SDR mandates all labelled products to have a clear, specific and measurable sustainability objective. The SFDR, however, identifies three categories of financial products with different transparency obligations but without a defined sustainability scope.
Alignment with TCFD and ISSB standards
The FCA has indicated its intention to update product-level disclosure requirements in line with future ISSB standards. Additionally, they plan on updating their Taskforce on Climate-Related Financial Disclosures (TCFD) aligned disclosure rules for listed companies to reference the ISSB's standards.
Unique aspects of the UK approach
The UK SDR introduces a unique labelling system with four categories: Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals. This labelling approach differs from the SFDR's current structure, although there are indications that the EU might consider a similar system in the future.
Another distinctive feature of the SDR is the 70% minimum threshold rule for all funds under the four labels. This contrasts with the SFDR's current 100% threshold for Article 9 funds, although there are discussions to reduce this to 80%.
The UK’s SDR follows a phased approach, ensuring a smooth transition for various entities in the financial sector.
From June 2024: Enforcement of regulations concerning product labels, initial disclosures, product naming and marketing begins.
From June 2025: Detailed disclosure mandates come into effect for firms with more than £50 billion AUM.
December 2026: Entity-level disclosure requirements for firms with AUM > £5bn will enter into force.
This gradual approach allows firms to adapt to the new disclosure norms progressively, ensuring a smooth transition to the new reporting landscape.
Sustainable investment labels
Set to come into effect from July 31st, 2024, the Financial Conduct Authority (FCA) has confirmed four distinct labels for sustainable investment products:
These labels aim to help consumers differentiate between various sustainability objectives and investment approaches.
Product-level disclosures
The SDR mandates comprehensive product-level disclosures for labelled products and those using sustainability-related terms in their naming or marketing. These disclosures include:
For labelled products, disclosures must include information related to the qualifying criteria for the labels. Non-labelled products using sustainability-related terms must disclose information on their investment policy, strategy and relevant metrics.
Entity-level disclosures
Firms with over £5 billion in assets under management are required to make annual entity-level disclosures in a sustainability entity report. These disclosures, building on the TCFD framework, must cover:
These elements relate to managing sustainability-related risks and opportunities. Firms using labels or sustainability-related terms in their product names and marketing must also disclose details on their resources, governance and organisational arrangements for those products.
As the UK aligns itself with global standards while addressing its specific market needs, the SDR is set to shape the future of sustainable investing in the country. This comprehensive framework has a profound influence on the ESG reporting landscape, introducing a unique labelling system and mandating detailed disclosures at both product and entity levels. The phased implementation approach allows firms to adapt gradually, ensuring a smooth transition to the new sustainability reporting norms.
To understand how this new SDR guidance affects your organisation, we recommend that companies take proactive measures by consulting with our expert sustainability scientists. This approach ensures tailored guidance on the new SDR reporting rules and best practices for seamless adoption.